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IRS and Treasury Issue Proposed Inversion Regulations on the Substantiality Test

The Obama Administration continues in its attempt to combat so-called inversion transactions. An inversion transaction occurs when a domestic parent corporation, through a corporate reorganization, becomes a subsidiary of a foreign corporation and the shareholders of the domestic corporation become a substantial portion of the shareholders of the foreign corporation. This allows the US company to claim its tax citizenship in a foreign country thus allowing it to escape worldwide taxation by the US on its foreign income. These transactions have also been used to bring trapped foreign profits home on a tax free basis. As such, they have caused a great deal of consternation and political handwringing.

Inversion transactions were previously attacked by the enactment in 2004 of IRC section 7874. But these restrictions have not been enough to eliminate the use of inversions as profitability returned to global companies.

In response to the return of inversions, the Obama Administration issued Notice 2014-52, which outlines the intent of Treasury and the IRS to issue new regulations.

The Notice sets forth a twofold approach to addressing inversions: First, the regulations will limit the new foreign parent’s ability to access trapped profits and other cash held in controlled foreign corporations (CFC). Second, the regulations will tighten existing rules contained in section 7874 and thereby treat more inverted companies as domestic corporations. The Notice states that the new regulations will apply to inversions completed on or after September 22, 2014.

These new regulatory provisions under section 7874 will make inversions less tax friendly to the US company. The press is already picking up stories concerning companies that are reconsidering their decisions to invert. This is a challenging and evolving area of the law which involves in-depth planning and evaluation of the appropriate partner in order to avoid tax consequences. We have been contacted by numerous investment groups as they seek to understand the rules and to discuss the likelihood of future Congressional and Administration actions.

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Contact our team today with any tax controversy concern you’re facing. We fight every day to protect the interests of the taxpayer, and we look forward to putting you in the best tax situation possible.

GET STARTED

Contact our team today with any tax controversy concern you’re facing. We fight every day to protect the interests of the taxpayer, and we look forward to putting you in the best tax situation possible.

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